One of Scotland Yard's most senior minority officers has accepted a substantial payout and an apology from the News of the World for false allegations arising from an investigation by the "fake sheikh" Mazher Mahmood.

The paper has backed down in the face of legal action from Commander Ali Dizaei after Mahmood, its star investigative reporter, claimed the officer "employed an illegal immigrant as his right-hand man and took him to the heart of the British establishment".

The subject of the story, Ace Bakhtyari, of Iran, was subsequently jailed for having a fake passport and deported. Dizaei, one of the Met's most high-profile officers, complained that the story implied he knew that Bakhtyari was an illegal immigrant but nevertheless employed him.

Describing what it alleged was an "incredible security breach", the paper detailed how Bakhtyari was taken to parliament where he met senior Labour figures such as the home affairs select committee chairman, Keith Vaz, and former home secretary John Reid. The report said Bakhtyari was able to bypass security because he was with Dizaei. It was also said that he had accompanied him to Scotland Yard.

But the officer maintained that the allegations were false and that he never knowingly hired an illegal immigrant to do any work for him. He said Bakhtyari was subject to the normal security procedures at the Commons and never visited Scotland Yard.

Dizaei's lawyers reached a settlement with News International, which printed an apology at the weekend. It said: "On 15 March 2009 we reported that Commander Ali Dizaei of the Metropolitan police was responsible for serious security breaches at the House of Commons and Scotland Yard. We now accept that this was not the case and that there were no security breaches nor did he (or his wife) knowingly employ an illegal immigrant. We apologise to Commander Dizaei for the distress and embarrassment caused by our report."

A statement formalising the deal and withdrawing the allegations will be read to the high court in the next few weeks.

Eddie Parladorio, Dizaei's solicitor said: "I think it is very regrettable that Commander Dizaei has been forced to take legal action. These were very serious allegations against a senior officer regarding his professionalism."

The payout comes at the end of an eventful year for Dizaei. He currently faces charges – which he denies – of misconduct in a public office and perverting the course of justice arising from the arrest of a man after a disturbance in a restaurant last July.

His profile has also led to other confrontations with newspapers. In September he received substantial damages and costs from the Daily Mail and the London Evening Standard after both papers falsely accused him of being a bigamist.

The latest settlement also bookmarks a difficult year for the News of the World following the Guardian's revelations that News International had reached out-of-court settlements with three people whose mobile phones had been hacked into.

One of them, Gordon Taylor, the chief executive of the Professional Footballers' Association, received £700,000. A parliamentary report into the affair has been delayed until next year so that MPs can hear from Rebekah Brooks, the chief executive of News International.

Last month the paper faced further criticism when it was forced to pay £800.000 to Matt Driscoll, a former sports reporter who told an employment tribunal he suffered from a culture of bullying led by former editor Andy Coulson, now David Cameron's head of communications. Driscoll was found to have suffered unfair dismissal and disability discrimination.

The newspapers are full of this story today. One journal reports that champagne corks are popping at the Met because Ali Dizaei is hated. Usually officers are sympathetic, it says, when one of their own is investigated,but Ali Dizaei is known as a bully and corrupt. He has played the race card each time he has been investigated and it now seems like there is cause for celebration: got the bastid at last!